Compound Interest
Definition:
The interest you pay on a loan or earn on a deposit or investment that is calculated based both on the initial starting balance, as well as the accumulated interest over time. It is the benefit to an investment, or added cost on a loan, of interest on interest, which accelerates the rate of growth of the initial starting balance.
Example:
The impact of compound interest helped her grow her retirement assets more rapidly.
More Information:
The impact of compound interest is calculated by multiplying the intial starting balance, or present value, by one plus the annual interest rate raised to the number of compound periods.
It is important to note that interest can be compounded on any schedule. Many debts, like credit cards and loans, compound and accrue interest daily. The more compounding periods there are, the more significant the impact of compound interest.
